WAILUKU — A Maui Vacation Rental Association official fears that two bills on property tax classifications recommended for approval by a Maui County Council committee could lead to higher property taxes for at least 2,900 property owners in Maui County.

But county officials and Council Member Riki Hokama, chairman of the council’s Budget and Finance Committee, say it’s too early to speculate about tax bills because new rates have not been set yet and many variables go into determining a tax bill, not only its classification.

Last week the budget committee recommended a bill to the full council that establishes a new property tax category for short-term rentals. Currently, short-term rental permit holders fall in the commercial classification.

Others facing reclassification to the new category include short-term rentals in hotel-zoned areas and condominium units where short-term rentals are allowed. Those owners currently fall in the hotel and resort classification.

Another bill recommended for approval would classify condominium units at their “highest and best use,” which is usually reflected in the property’s zoning, said Scott Teruya, Maui County’s real property tax administrator. This proposed change could affect units being placed into the proposed short-term rental classification because many condominium units are built on properties zoned hotel, are grandfathered in for short-term rental purposes or have received conditional permits to operate short-term rentals.

Those who use their units as their primary residence can claim the homeowners exemption and would not be affected by these bills, Teruya said.

The two bills will be up for first reading Friday at the council’s 9 a.m. meeting in Council Chambers.

Although the budget committee did not set property tax rates in its proposed bills, Tom Croly of the Maui Vacation Rental Association says that, more than likely, taxes would go up for those affected by the changes.

“I can guarantee you that rate (for the short-term rental tax category) is not going to be lower than the current rate of the hotel class,” he said. “It is really obvious right now that rate is going to be at least as high as the hotel classification.”

Under current tax rates, short-term rental permit holders could see an increase of 29 percent in their property taxes, he said. Croly based his calculations on the current commercial rate, which is $7.28 per $1,000 of net taxable assessed valuation, and an estimate of the short-term rental rate near the hotel rate, currently at $9.37 per $1,000.

Croly estimates taxes could increase by 48 percent for condo unit owners not in the short-term rental business but who own units in complexes where short-term rentals are allowed by zoning.

Those properties may be in the apartment classification, where the current tax rate is $6.32 per $1,000 of net taxable assessed valuation, he said. He applied his $9.37 per $1,000 calculation for the proposed short-term rental category.

These changes also could affect newly permitted short-term rental permit holders in residential districts, he said. The residential rate is $5.54 per $1,000, compared to the estimated short-term rental rate of $9.37, a 69 percent increase.

Croly explained that the short-term rental rate would need to be at least as high as the current hotel rate because the 10,769 condo owners currently in the hotel class who would move to the short-term rental class generate 80 percent of the tax revenue from the classification.

Rates could be lower for the new proposed classification, but not by much because revenue losses would have to be made up by increases in other classifications, he said.

Hokama says the changes are purely to clean up the County Code, adding that it is too early to tell what the impact could be on individual property tax bills. The changes “weren’t revenue driven,” he said.

“Over the past eight years, the plan has always been to clean up the (County Code) in relation to real property tax,” said Teruya. “Our division sets assessments, not taxes. When tax rates are set by the County Council in June, that will determine if they pay more, less or the same.

“This proposed new classification stemmed from public testimony where short-term rental properties argued they were not like a hotel and therefore proposed to add a category for similar uses.”

Teruya countered Croly’s comments, saying there are many factors that determine property tax bills, including the rates set by the council, overall property valuation and how much money the county needs in its budget.

On Croly’s point that short-term rentals will be taxed at nearly the same rate as hotels, Teruya said that short-term rentals and hotels are different types of properties, so valuations may differ by category. Properties having their own classifications will be fairer for all.

Prior to an amendment several years ago that placed nonprimary residence short-term rentals into the commercial classification, the rentals were in the hotel and resort classification, Teruya said.

Hokama said the Real Property Tax Division felt that short-term rentals needed their own category because they are not exactly commercial properties nor exactly hotels either.

“We don’t know what the revenue impact is going to be, it all depends what the rates are set at,” he said.

Croly also noted that the proposed short-term rental category throws together 225 properties granted short-term rental permits, which allow the use of single-family homes, with 10,769 condo owners who are allowed to do short-term rentals under zoning.

Testifiers at Tuesday’s budget committee meeting said that getting a short-term rental permit is difficult and comes with restrictions that do not apply to condo short-term rentals. They noted that short-term rental permits are nontransferrable; owners of condo short-term rental units can sell their units and the new owners can continue to use them as a short-term rentals.

Short-term rental permit holders also complained that higher property tax bills would hurt them even more as they compete against unpermitted short-term rentals.

On the other proposed major property tax change, Teruya explained that removing the condo classification system, which currently is based on actual use as opposed to highest and best use, would bring this class in conformance with all other property classes.

The elimination of the condo use declaration, one of the most common forms submitted to the division annually, could free up staff time, Teruya added.

The condo bill does have an option for unit owners who run long-term rentals to still be placed under the apartment classification.

But Croly and officials with the Realtors Association of Maui say the process to dedicate a unit as a long-term rental is difficult and onerous. A property owner has to register a lease with the state Bureau of Conveyances, petition the director of finance for dedicated use, forfeit any right to change the use for 10 years and agree to retroactive penalties fines and taxes as a lien on the property, said Lawrence Carnicelli, government affairs director for the Realtors Association of Maui.

He told the committee that those steps and the costs, such as hiring an attorney, could lead owners to raise their rent or turn to short-term rentals.

* Melissa Tanji can be reached at mtanji@mauinews.com.